Buffer ETF Portfolio Construction

Steps to creating a simple Buffer ETF portfolio:

1. Choose your desired level of downside protection.
   Buffer ETF issuers typically offer downside protection of 9%, 10%, 12%, 15%, 20% or more. So, you need to decide how much protection you would like during the outcome period.
   
2. Choose the reference asset for your Buffer ETF.
   Buffer ETFs track many different major stock market indices, so you need to choose your reference asset for the outcome period. Most Buffer ETFs track the S&P 500 (SPY), but if you want to track the Nasdaq 100, small caps or foreign indices, they are also available.
   
3. Choose your preferred defined outcome period.
   Most Buffer ETFs have a defined outcome period of 12 months, but there are also quarterly and semi-annual resets available for purchase. Choose the outcome period that best fits your time horizon, risk profile and market outlook.
   
4. Choose the Buffer ETF month to purchase.
   Buffer ETFs are typically offered with annual reset dates. So, depending on when you are ready to purchase your Buffer ETF, invariably many will already be in the middle of an outcome period, which means the potential outcome parameters will be different than they were on the reset date. Typically, you will want to buy a Buffer ETF on its reset date, so the timing of your allocation will likely depend on the date when you are ready to construct your portfolio. Thankfully, with so many Buffer ETFs to choose from, there is a Buffer ETF that resets every month, so you never need to wait long for a reset date to come around.
   
5. Check the potential outcome parameters on the issuing company’s website before making a purchase.
   Before making a Buffer ETF purchase, it’s critical you check the potential outcome parameters on the issuing company’s website. For example, if you are buying an Innovator Buffer ETF, go to Innovator’s website (www.innovatoretfs.com) and check the price and potential outcome parameters (buffer level and upside cap) prior to making a purchase. Remember, the parameters will change throughout the trading day, so it’s important to know the potential outcome parameters (downside risk and upside potential) before entering an order.
   
   With over 160 Buffer ETFs available for purchase on U.S. markets, it’s important to understand some key features of Buffer ETFs, and more importantly, the optimal time to make purchases.
   Buffer ETFs typically reset once per year. The four option contracts within the ETF wrapper expire and four new contracts are purchased with a fresh buffer and a new upside cap. Since option prices change throughout the trading day, the “defined outcome” will also change daily for Buffer ETFs.
   The recommended date to purchase Buffer ETFs is on the reset date. The reset date depends on the preference of the issuing company. You can view the reset date for any Buffer series on the issuing company’s website. Visit www.allianzIM.com, www.ftportfolios.com, or www.innovatoretfs.com for more information.
   
   Here’s how to construct a simple Buffer ETF portfolio:
   
   Let’s assume you have $1 million to allocate to Buffer ETFs. You are a long-term investor, but you would like some level of protection in your portfolio while still having upside growth potential, to a cap. Using two offerings from Innovator that provide 15% downside protection, the October and November U.S. Equity Power Buffer series, here’s how you could time your purchases:
   
   Innovator U.S. Equity Power Buffer – October (POCT)
   
   On September 30, 2023, POCT reset at the end of the trading day. A recommended purchase would take place in the final hour of trading on that day. The upside cap of POCT had been indicated at over 15% the week prior to the reset date, with downside protection on the first 15% loss over the coming 12 months.
   
   You could invest half your portfolio ($500,000) in POCT, in the final hour of trading on September 30, to closely capture the outcome parameters for the next 12 months.
   
   Innovator U.S. Equity Power Buffer – November (PNOV)
   
   So, you now have half your portfolio allocated in one Buffer ETF. You have decided to invest your remaining cash ($500,000) in the November Power Buffer series, which resets one month later, on October 31. As the reset date nears, indications as to the upside cap for the November series are favorable. The gross cap is indicated at 15.7% for the coming 12-month period, with protection on the first 15% loss. Note, the issuing companies typically provide upside cap estimates beginning one week prior to the reset date.
   
   On October 31, the reset date of the options within the ETF wrapper, you would make your purchase in the final hour of the trading day.
   
   You could obviously stagger your Buffer ETF purchases over several months or more and build a more diversified laddered portfolio. However, if the upside cap is attractive when you have cash available to invest, there isn’t much reason to delay purchases, unless you believe markets are very extended, overvalued and due for a sizeable correction. If not, one could argue to go ahead and allocate your entire portfolio within 1-3 months.

There are many ways to construct a Buffer ETF portfolio. A good start is to simply purchase one or two Buffer series, with attractive upside caps, with the intention of holding them at least for the outcome period, and ideally as long-term investments too.

Caveat Emptor (Buyer Beware): Do not purchase Buffer ETFs without knowing the potential outcome parameters. These are provided daily by the issuers of Buffer ETFs. Buffer ETF potential outcome parameters change throughout each trading day, so you will always want to check them before making a purchase.